Last summer’s scorching Midwest drought not only took a drastic toll on the nation’s corn yields, it sent livestock feed prices soaring and caused an unusually quick and sharp reduction in beef, pork, and poultry numbers that will have repercussions through 2013, says American Farm Bureau Federation Deputy Chief Economist John Anderson.

“This year’s drought was something of an odd situation because reactions by producers were atypical,” he said at the annual meeting of the Mississippi Farm Bureau Federation.

“The striking thing about the meat sector’s reaction to the drought was that it didn’t proceed the way it usually does. Normally, when a drought is starting, everyone sorta hunkers down and tries to wait it out. Then, when everybody can’t hang on any more, we see a big market purge and everyone moves on. That’s pretty much the standard reaction. But that’s not what happened in 2012.”

When the June weather market started in the grains sector, corn prices started really taking off and the drought seemed a long-range thing, there wasn’t any hunkering down in the livestock sector, Anderson says.

“There was an immediate purge. We saw dairy cows going to market, we saw beef cows going to market, we saw hogs going to market, we saw poultry producers putting the brake on any expansion. Growers weren’t waiting to see how things would play out — they were getting numbers down to levels they thought they could live with.

“I think the biggest factor was that pork production really went through the roof, which put a lot of pressure on wholesale meat prices, and packers were unable to move meat at a level they’d like.

“The pork sector reacted really swiftly to higher beef prices and started pulling market hogs ahead a lot faster than we expected. We had a huge surge in pork production through midsummer that not many had anticipated.

“The big run in pork prices coincided with the big leg downward in feeder cattle prices. It was even more severe on medium weights, the 400- to 500-pounders. We had a situation where feed prices were going up, and the bigger cows looked more attractive in the feedlots. Smaller cows just had a lot farther to go to get them finished with $8 corn. And for the most part, they still haven’t recovered as well as the larger cows.”

Looking to 2013, Anderson says, “I think the story is that numbers are going to be tight, and meat supplies are going to be very tight — even tighter than this year.

“I’m a little less optimistic than a year ago about the general economy, but if we can get some kind of slow but steady growth like we’ve had the last year or two, at least the economy won’t be a drag on the market.

“We ought to have strong fed cattle markets, with a good spring high, close to where we were last year, maybe a buck or two higher, followed by a very modest summer drop, 5 percent or so, then back up to a strong fall market.

“I think maybe we’re in a bit better shape on the supply side, because the drought has forced some additional contraction, which should give supply more support on for 2013.”

Big question: cow inventory 

With corn prices still high, Anderson says, feeder cattle aren’t likely to get back to last spring’s price highs. “They’re well below the $160 range we saw in the spring. With corn prices looking to be well-supported for most of the rest of this marketing year, I don’t think we’ll take out those highs. We could get back into the low $150s for Southern Plains feeder cattle.”

This year has been “a really tough one” to try and figure out what’s been going on with inventory levels, he says. “The big question over the next couple of months will be what’s our cow inventory going to look like?

“In 2012, we never got above year-ago slaughter levels, even in the middle of the drought. We were way below 2011 levels — which is not what we’d expect in a drought.

“But, this was the second year of drought for the cattle industry. Texas, Oklahoma and the Plains region were devastated in 2011, and a huge liquidation took place. So, when it came to projecting future inventory levels we were comparing 2012 with what was already an abnormal situation.

“We went from well below the three-year average to right in line with the average, even with a smaller cow herd. There was a quick purge, with average or above slaughter levels, and everyone then tried to hold what they had. We were consistently at or below average slaughter levels for most of the fall.

“The questions now: Is that over? Are cow numbers down as low as they’re going to go? Or do we have another little bit of purge coming in the cow inventory? I don’t think we’re through yet; I don’t think we’ve had all the liquidation we’re going to see nationally.”

It’s a bit different in the Mid-South, where producers have a lot of grass and have had an exceptionally good hay crop this year, Anderson says.

“But that’s not the case elsewhere — in the rest of the country, there’s not a lot of hay. Hay numbers are the lowest they’ve ever been; even adjusting for a smaller herd, it’s a very tight hay inventory.

“There are a lot of people around the country with just enough hay to make it until about February 10. And that’s not long enough for most to make it through next spring.”

Further, Anderson says, “I think the hay inventory is pretty loose in terms of what’s being classed hay — anything that’s rolled up and got twine around it is being called hay in a year like this.”

After Jan. 1, he says, “I think there will be some pretty strong incentives to sell more cattle,  and cow inventory numbers will decline from where they are now. I think inventory could drop another 1 percent to 1.5 percent, and given current numbers that’s a pretty substantial drop.”

With calf and cows on feed numbers, Anderson says, the effects of a small inventory “are really starting to take hold in placement numbers. For the last three months, placements have been well below year-ago levels, and I think that will probably continue. 

“We’re not out of cattle, but we have reached the point where the pulling-ahead effect we’ve seen in numbers has run its course. Inventory has reached the point we’re going to see substantial drops in placement numbers going forward, and in the cattle on feed inventory. We’ve had a couple of months where we’ve seen cattle on feed inventory drop well below year-ago levels, and I think we’ve got to expect that to continue.”

That has been somewhat offset, “to a bigger degree than I would’ve thought possible,” Anderson says, “by moving cattle up to heavier weights. It has been a real shock to me, with $7 to $8 corn, to see big year-over-year increases in slaughter weights all through the summer and fall. That’s really phenomenal.

“Part of that, I think, is the supply management strategy of the packers: ‘We’ll take them bigger, because we know we’ve got fewer of them coming.’”